AFIA Actively Pursues Commodity Market Reform
By Joel Newman

Recognizing that excessive speculation was one of six factors that allowed the commodity market bubble to occur in July 2008, and that this was one factor that could be controlled, the American Feed Industry Association has been working for the past 19 months to attain reform that will ensure these markets remain viable risk-management and price-discovery tools for the feed industry and other end users.

While the commodity markets need and depend on speculative participants, the issuing of speculative position-limit exemptions to some Wall Street banks to enhance hedge fund participation in 2000 has had the unintended consequence of these funds driving the commodity markets to a large degree. The influx of $260 billion invested by hedge funds in commodities in the first half of 2008 artificially drove demand and prices to unrealistic levels. That situation then quickly evaporated with the removal of fund dollars in the fall of 2008, causing additional harm to the efficiency of the markets and our industry. Without reform, this scenario can and will most likely reoccur.

AFIA has worked with key legislators, administration officials and the Commodity Futures Trading Commission to identify appropriate and achievable reforms to meet this objective, while not creating other unintended consequences in the future. We also have been active in a broader coalition of related industries, with business interests ranging from heating and motor-fuel retailers to cotton marketers, and trucking companies to airlines, to strengthen our combined voice on this issue. I am pleased to report we are making good progress.

Congressman Collin Peterson (D-Minn.), chairman of the House Committee on Agriculture, passed a bill last fall that encompasses most of the reforms we have advocated. Sen. Blanche Lincoln (D-Ark.), chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry, is currently working on Senate legislation that also will include our recommended reforms.

In addition, Chairman Gary Gensler and his team at the CFTC also agree on the need for some reform and a majority of our recommendations.

AFIA’s recommendations would:

• Remove the exemption from speculative position limits granted to Wall Street banks by Congress/CFTC in 2000.
• Bring all agriculture and energy commodity trades under CFTC authority and enforcement. This would ensure over-the-counter and foreign exchanges, which are trading on U.S. exchanges, are reporting all positions and are held to the same established limits.
• Ensure that physical producers and consumers of these commodities should have a seat at the table when setting speculative position limits for agriculture and energy commodities.
• Provide CFTC with appropriate funding and staffing to fulfill its responsibilities and uniformly enforce controls over all markets.

If you have questions or comments about this issue, please contact Joel Newman, AFIA president and CEO, at (703) 558-3562 or jnewman@afia.org.